The time to drop barriers to trade with Pakistan

…is now

Pakistan’s economy is in a tailspin. Since the second last thing that the international community wants in Pakistan is an economic meltdown, Friends of Pakistan are coming together to provide emergency foreign aid.

Now how Pakistan’s western and Middle Eastern ‘friends’ want to spend their money is their call. For India’s part, this is an excellent opportunity to liberalise bilateral trade, unilaterally if necessary. That’s why the Manmohan Singh-Asif Zardari meeting falls short: it just doesn’t go far enough on free trade.

Just how is Pakistan going to ‘export more’ and ‘import less’ in the medium term unless it expands trade with India? While there is some awareness in Pakistan that it will always need to rely on the charity of its ‘friends’ unless it normalises its relations with India, the fact that such charity comes rather easily creates disincentives for Pakistan to drop its self-defeating approach to bilateral trade. Perhaps some ‘friendly’ advice is in order.

18 thoughts on “The time to drop barriers to trade with Pakistan”

  1. There’s a background to all this. India has been very positive on trade with Pakistan. This is reflected in India giving Most Favoured Nation (MFN) status to Pakistan, as part of the South Asian Preferential Trade Agreement (SAFTA), as early as 1995, and more recently in 2006 when the South Asian Free Trade Agreement (SAFTA) was ratified. But Pakistan has refused to reciprocate all along.

    If bilateral trade between India and Pakistan hasnt really taken off, it is more because of the paranoia of the Pakistani establishment with respect to increased trade relations with India. The extent of the paranoia can be gauged from the fact that Pakistan imports iron ore from Australia when it can get it extremely cheap (relatively) from India.

    God knows when the Pakis will realize the goodies that trade with India will offer. But I guess some day they’ll have to open up. The West will fund Pakistan only as long as they have business in Afghanistan. Soon after the West’s Afghanistan project is over, Pakistan will have to start begging from other sources. It can preempt such a situation by gradually liberalising trade with India. When Pakistan does open up, the prospects for both the countries and the South Asian region as a whole are mindboggling. Pakistan will be thinking “Why didnt we do this earlier!”

  2. The Pak mentality (‘martial race’ and all that) is so fearful of the Chanakyan designs of the evil yindoo banias that they (and in fairness, it was mostly the Army driving this) have been vehemently opposed to normalizing trade relations with India.

    Even then, they’ve had to import essentially during emergencies.

    And yup, they’ve never had qualms about smuggling in everything bollywood.

    With their ever worsening economic situ, would be interesting to watch which way Pak goes. Opening trade with India will be a clear defeat for the Pak army’s perniciuos hold on that land. And that is certainly laudable.

  3. Indian govt is still a socialist/pseudo-communist govt which doesn’t give much economic freedom to even its own citizens and looks at every $ flowing in as FDI with suspicious eyes. While I would also argue for greater economic freedom, with the current neta and babu setup, it would be wishful thinking to ask for liberalising trade with Pakistan, which is perceived as an eternal enemy [I don’t agree with this view too].

    If suppose trade is liberalised -> then if suppose economic reasons overweigh political –> then our netas and babus wouldn’t be able to secure their vote banks by blaming Pak for every other bombing, as they are doing so now.

    As said by sud above, Pak Army would also be worried to let its monopoly go, since I heard the PA runs malls, shops, et al. A truly civilian Army, catering to entertainment and needs of civilians 🙂

    But I guess Pakistan is more liberal in economic areas, as has been indicated by economic freedom index, when compared to India. So who is Pak trading with? If Pak Army is comfortable with Pak trading with non-Indian trade houses, why should/would it oppose trade with India?

  4. If suppose trade is liberalised -> then if suppose economic reasons overweigh political –> then our netas and babus wouldn’t be able to secure their vote banks by blaming Pak for every other bombing, as they are doing so now.

    Not quite, Venkat. People-to-people relations (bus services, rail routes, music concerts) have been improving while simultaneously the government has been blaming Pakistan for terror attacks, the most noteworthy being Mumbai, July 2006. Trade and terror can go together, fortunately or unfortunately.

  5. Nitin:

    Given your realist credentials I would be interested in knowing how this policy fits your worldview.

  6. Pakistan is a castle built on sand & the structure is of false hope, greed & betrayal, an impotent country without any identity nor any National character & this fact is very well known to it’s Rulers & Intelligensia, who have been constantly feeding the masses with the ‘Jinnah & Iqbal(sic)promises of Pakistan’, & they mask this impotency by pointing the finger towards malicious India as the conspirator for all the ills that keeps them underdeveloped, thus, the Paranoia, if any positive exposure of their brainwashed masses with India, shall surely destroy the myth of their meaningless nation Papistan, & is fraught with the danger of collapsing the spineless feudal mess.
    The last nail in the coffin of ‘Jinnah’s ideal Pakistan’ was 9/11.
    Regards to Iqbal the Poet-
    “The poet’s mind and the scorpion’s tail rise in glory from the same earth.”
    – Kahlil Gibran
    It seems as if the Americans have postponed ‘Operation Iran’ & are giving priority to ‘Operation De-Nuke Islamic Pakistan’ (although I have serious reservations about the sly Chinese, & their substandard products are no secret, what if the Chinese nukes are ‘phuski’ bombs like the ones we buy during Diwali? As a genuine well wisher & in true neighbourly spirit I suggest that Pakistan should try a couple of those Chinese nukes on Karachi & Islamabad to test their reliability).

  7. What does Pakistan have which India can not grow/make or import from elsewhere for a competitive price?

  8. Trilok’s question is worth answering. Of course trade once established will answer it. But whether or not to open trade requires that we have some answer to what that trade will consist of.

    It is because of the existence of comparative advantages and disadvantages that trade is welfare improving to both trading parties. CA exists whether or not trade is allowed. The question is therefore which are the areas in which CA exists in the context of India and Pakistan.

  9. Atanu,

    The question has been answered. Nisha Taneja’s 2006 study and Amir Ullah Khan’s 2004 paper offer the detailed answers. My point is that while these may be indicative of what might happen when trade is liberalised, we don’t need to make liberalisation conditional to a certain pattern of trade (which are dynamic). [Of course, the comparative advantage argument is conditional to economic freedom at home. And economic freedom is desirable in its own right, with or without trade with Pakistan.]

    According to Taneja, the informal trade in 2006 was between $250m to $2 billion. It’s probably higher now. This includes cross-border smuggling and legal trade routed through third countries. To the extent that informal trade lines the pocket of the bad guys, bringing it into the open will already benefit India.

  10. Nitin,

    Thanks for the references. Time permitting, I will take a look at them. But be that as it may, I am not in favor of trade with Pakistan as a matter of principle. Pakistan is not a “friend” of India. By that I mean that neither the leadership nor the general population of Pakistan is favorably inclined towards India. It is a harsh fact and has to be considered without flinching.

    It is well and good to say that trade ties will make the situation better. I am not convinced that it will. The generalized animosity towards India does not exist because there is little trade with India. The source of that lies elsewhere and greater trade could in fact heighten the animosity. Trade may reveal a greater economic gulf between the two and increase the sense of grievance that already exists.

    Trade is good in a first-best world. In a second-best world, opening trade may make things worse. This is a simple argument but is not invalidated merely because it lacks all sorts of complexities that one associates with deep analysis.

  11. My dear Atanu,

    The argument for trade is neither based on the existence or the expectation of friendship.

    It is based on the need for policy alternatives. (See this post)

  12. Pakistan is already exporting to India, in bulk, the good it enjoys a comparative advantage in producing, and that is Terrorism.

  13. Nisha Taneja’s 2006 study
    IV.5. Informal Trade
    ‘While the survey also aimed at eliciting information on the value and nature of goods being traded informally, no specific information on this aspect could be obtained through the survey. However, all traders agreed that informal trade was substantial, particularly through third countries such as Dubai. Traders when asked about what products were traded informally answered that almost every exportable item was being exported to Pakistan through third countries’.

    —– What more has India to benefit in this scenario? Rather thanks to this extra bulk sale, Indian products (& the bad guys) also become viable to the Eastern European mkt mainly catered via Dubai.

    ‘The survey revealed that cross-border informal trade takes place through passengers traveling by train and by bus, though informal trade is much larger on the train route’.

    — For this point to be considered worthy —it’s a Joke.

  14. Was there something about eating grass when defending the land of pure? Well may be it’s time. Mush used to boast that US wasn’t propping up LoP’s economy. Well, we know Mush was wrong – on at least one thing! Now the shooting war started between the two, one can forget any more propping up.

    And from what little I can gather about trade relationship, it’s LoP that’s buying via third country – increasing cost of doing business with us all by itself. Is there something that LoP only offers that we would be interested in, except terrorists? I really doubt that.

    Any good will never come out from bailing out LoP. A rich and prosperous LoP is not in our interest, just like that other rich country to the north and east. And we can surely live perfectly without trading with it. But being who we are, I am sure our government will unilaterally bail its troubled economy out via trade or aid….

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